1. The state of your emotions must be monitored at the door
"Successful investment doesn't depend on the ability of an individual... what you require is the grit and determination to be able to resist the desires of others which could lead them into financial trouble." That's wisdom from Warren Buffett, chairman of Berkshire Hathaway and an oft-quoted investment guru and role model for investors looking for long-term, long-term, and market-beating returns.
Before we dive in, let's give you one suggestion. We suggest not investing in more than 10% individual stocks. The remainder should be put in a mix of low-cost index fund mutual funds. Anything you'll need to have in the next five years shouldn't be put into stocks at all. Buffett means investors who let their heads guide their investment decisions, but do not go with their gut feelings. In fact, trading overactivity triggered by emotions is one of the most common ways that investors can harm their own portfolio returns.
2. Do not pick ticker symbols. Instead, look for businesses
It's easy to overlook that the source of the alphabet soup of stock quotes crawling along the bottom of each CNBC broadcast is a real business. Don't let stock-picking be a figment of your imagination. You're part-owner of the business if you purchase one share of its stock.
"Remember that buying shares of a stock company is like becoming a part owner of the company in question."
When you're searching for prospective business partners, you will encounter a wealth of data. It's easier to locate the right information when you're an "business buyer". You must know how the company operates, where it is in the industry and who its competition is as well as what its long-term goals are and whether it will add value to the current businesses you have.
3. Do not panic in times of panic
Investors may be enticed by the prospect of changing their relationship with stocks. But making heat-of-the-moment decisions can lead to the classic investment error of purchasing high, and then selling cheap. This is where journaling comes in handy. Make a note of the factors that make each stock worth your time and note any other circumstances that could justify you to separate. Think about this:
What I'm buying What do you love about the company and the opportunities that you anticipate in the near future. What do you expect? What metrics and milestones are most important to you in evaluating company progress? The risks that might befall you and the best way to spot them.
What would drive me to sell What are the good reasons for a split. The journal you keep should contain an investment prenup. It will outline what you'd do in order to make the shares saleable. This isn't about the fluctuation of prices particularly in the short-term. But, we're talking about fundamental changes in the business that affect the company's ability to grow and its potential in the longer term. The following are instances: Your investment plan is not realized after some time when the CEO loses a crucial client, or the successor to the CEO moves the company in an entirely different direction.
4. Slowly begin to build positions
The most powerful asset of investors is timing, not time. Investors who are the most successful invest in stocks with the expectation that they will be rewarded via dividends or share price appreciation. -- over time, or even years. This means that you can take your time when buying as well. Here are three strategies for buying that will help you reduce your risk to price volatility
Dollar-cost average: It may sound complicated, but it's not. Dollar-cost averaging is the practice of investing a certain amount at regular intervals. For instance, each month or week. The set amount is used to purchase more shares when the price goes down and fewer shares when it goes up however, overall it is the average price you pay. Online brokerages let investors set up an automatic investing schedule.
Buy in thirds. This is like dollar-cost averaging. You can get past the negative feeling of disappointing results from the beginning. Divide the amount you'd like to invest by three. Choose three points to buy shares. These can be set at regular intervals (e.g. quarterly or monthly) or solely based on the company's performance. For instance, you may purchase shares prior to a new product comes out and put the remaining third of your cash in play if the product is a hit -- or put the rest elsewhere in the event that it isn't.
You can't choose which company within a specific field will prevail in the long run. Every stock is good! The stress of selecting the "one" stock is relieved by buying a range of stocks. Being able to hold a stake in all of the companies you've analyzed means that you won't be in the dark if company fails. It is also possible to use any gains from the winning company to offset any losses. This strategy will allow you to identify "the one", and you can then double your position, if needed.
5. Do not trade too much
Monitoring your stock once per quarter -- for instance, when you receive quarterly reports -- is enough. It's difficult to not keep your eyes on the board. This can lead to overreacting to short-term events or events, and focusing on share prices instead of company value, and feeling that you have to act when no action is warranted.
When one of your stocks suffers an abrupt price increase, find out what triggered the change. Are you afflicted by collateral harm? Has something changed within the fundamental business of the business? Does it have a significant impact on the company's future? impacts your long-term prospects?
In the short-term, noise like flashing headlines or price swings aren't really important to the performance of the company over time. The way that investors react to the news that is important. The investment journal can be a helpful guide for keeping calm through the inevitable downs, ups and changes that stock investing brings.